CHAPTER 1

INTRODUCTION TO
ACCOUTING RECORDS
UKAM1023
ACCOUNTING FOR BUILDING MANAGEMENT

READING REFERENCES
Morni, H., Tuam, K., Lim, W., Lee, K.,
Noreen, K., & Rahizah, A. (2013). Financial
Accounting 1. Shah Alam, Selangor,
Malaysia: Oxford Fajar Sdn. Bhd.
Wood, F. and Sangster, A. (2012). Business
Accounting 1. Chapter 1, 10
Levitin & Monteiro (2009), Property
Management Accounting ch.1
Ebisike, O.A. (2010). Real Estate Accounting
Made Easy. John Wiley & Sons. Inc. Ch 2:
Basic Real Estate AccountinG

OBJECTIVES
Students will learn about concepts and
conventions that govern the accounting
process, the history of accounting and
examples of trading entity accounts

LEARNING OBJECTIVES
At the end of this lecture, students should be
able to:
Explain the term accounting
State and explain the concepts and
conventions that govern the accounting
process
Draw up a simple trading entity account

WHAT IS
ACCOUNTING?
CHAPTER 1
INTRODUCTION TO ACCOUTING RECORDS
UKAM1023
ACCOUNTING FOR BUILDING MANAGEMENT

WHAT IS ACCOUNTING?
It is a process of:
Identifying, measuring and communicating
economic information to permit informed
judgments and decisions by users of
information.

Key words: identify, measure, communicate,

economic information, informed judgment,
decisions, users

ROLE OF ACCOUNTANTS
Goes beyond the traditional role of
bookkeeping
They record, analysis financial information
and interpret financial results to assist
investors in decision making
Today, accounting professional bodies are
so powerful, that one cannot practice as an
accountant if one is not a member of the
professional body

ACCOUNTANCY IN
MALAYSIA
In Malaysia, the word accountant is a
protected word.
One cannot practice as an accountant if s/he is
not a member of the Malaysian Institute of
Accountants (MIA).
There is currently only one local accounting
professional bodies in Malaysia, the Malaysian
Institute of CPA (MICPA). MIA is a regulatory
body that governs accounting practices.
The Malaysian Accounting Standards Board
(MASB) is established under the Financial
Reporting Act 1997 as an independent authority
to develop and issue accounting and financial
reporting standards in Malaysia.

OBJECTIVES OF
ACCOUNTING
To answer:

Is the business making a profit or a loss?

What is the business worth?
What is a transaction worth?
How much cash is in the business?
How wealthy is the business?
How much is the business owed?
How much does the business owe?

Keeping a financial check on activities.

WHAT IS BOOKKEEPING
Bookkeeping is the process of recording data
relating to accounting transactions in the
accounting books.

USERS OF ACCOUNTING
INFORMATION
INTERNAL

EXTERNAL

Managers
Employees
Owner(s) of the
business

A prospective buyer
The bank
Tax officer
A prospective partner
Investors
Creditors

ACCOUNTING
EQUATION
CHAPTER 1
INTRODUCTION TO ACCOUTING RECORDS
UKAM1023
ACCOUNTING FOR BUILDING MANAGEMENT

ACCOUNTING EQUATION
Resources supplied by the
owner

Capit
al

= Resources in the
business

= Asse
t

But if someone else has provided some of the

assets:
Capit
al

= Asset Liabilities

ACCOUNTING AND PROPERTY

MANAGEMENT
As a property manager, its your job to
manage the books for your rental owners
and homeowners. Each property,
condominium, and association has its own
set of books.
A single transaction between two parties is
actually recorded in two different sets of
books. E.g. when you collect management
fees, the fees are recorded as an expense
on the owners books and as income on
your books -----> called double entry

DOUBLE ENTRY
BOOKKEEPING
Double-entry bookkeeping is at the very
centre of modern accounting.
The primary rules of this system are simple:
For every transaction listed in the general
journal, there must be at least one debit and
one credit.
The sum of all debits must equal the sum of
all credits.

CHART OF ACCOUNTS
A chart of accounts is a list of all accounts a
landlord or property manager uses to
categorize his transactions.
The five major types of accounts are:
Assets: things a property owns
Liabilities: amounts a property owes
Equity: amounts that belong to the propertys
owners after subtracting whats owed
Income: amounts a property earns
Expenses: amounts a property spends

CHART OF ACCOUNTS
(Example)

CHART OF ACCOUNTS
(Example)

CHART OF ACCOUNTS
(Example)

CHART OF ACCOUNTS
(Example)

CHART OF ACCOUNTS
(Example)

CHART OF ACCOUNTS
(Example)

CHART OF ACCOUNTS
(Example)

ASSETS
Assets are probable future economic
benefits obtained or controlled by a
particular entity as a result of past
transactions or events.
Example:

Cash and cash equivalents

Investments: stocks, bonds, term deposits
Accounts receivable
Prepaid assets: prepaid insurance, prepaid rent,
prepaid taxes

Property, plant, and equipment

Land & Buildings
Inventories

LIABILITIES
Liabilities are probable future sacrifices of
economic benefits arising from present
obligations of a particular entity to transfer
assets or provide services to other entities
in the future as a result of past transactions
or events.
Liabilities can also simply be described as
what an entity owes others.

LIABILITIES
Example:

Accounts payable to vendors

Salaries and wages payable to employees
Taxes payable to the government
Loans/borrowings
Unearned revenues
Accrues expenses: accrues insurance, accrued rent

EQUITY
Equity represents the entity owners net
stake in the business entity.
The term owners equity is commonly
used in a sole proprietorship form of
business.
If the entity is a corporation, the term
shareholders equity is commonly used.
In a partnership, such equity is commonly
referred to partnership interest.
Mathematically, Equity = Assets Liabilities

EQUITY
Example:

Paid up capital
Preferred shares
Treasury shares
Retained earnings/accumulated profits

REVENUE
This represents inflow of assets (e.g. cash)
received in exchange for goods or services
provided to customers as part of the core
business activities.
Common revenue accounts in property
management include:
Rent receivable/ Percentage rents from
tenants
Bad debts recoveries
Property taxes recoveries

EXPENSES
These are outflows or the using up of assets
(e.g. cash) as a result of the core business
activities.
Example:

Salaries and wages

Utilities: electricity, water, telephone expenses
Cleaning
Taxes
Management fees
Security

ACCOUNTING BASIS
CHAPTER 1
INTRODUCTION TO ACCOUTING RECORDS
UKAM1023
ACCOUNTING FOR BUILDING MANAGEMENT

ACCOUNTING METHOD
Cash Basis
Cash basis accounting is a method of
bookkeeping in which revenues are
recognized when the related cash is
received and expenses are recorded when
cash is paid.
This method is commonly used in small
businesses where transactions are less
complicated and where revenues are
mostly cash sales and purchases are mostly
cash purchases.
Under this method, accounts receivable,
accounts payable, and prepaid expenses
are very immaterial to the business entity.

ACCOUNTING METHOD
Accrual Basis
Accrual basis accounting is based on two
very important accounting principles: the
revenue recognition principle and the
matching principle.
The revenue recognition principle says,
among other things, that revenues should
be recognized at the time they are earned,
not when cash is received;
The matching principle says that expenses
should be recorded in the same accounting
periods as the revenues are earned as a
result of the expenses incurred.

ACCOUNTING METHOD
Accrual Basis
RENTAL REVENUE RECOGNITION
Rent should be recognized as income over
the lease term on a straight-line basis
unless another systematic and rational
basis is more representative of the time
pattern in which the leased property is
used, in which case that basis should be
used.
In practice, the use of another method
other than straight-lining is very rare.

FINANCIAL REPORTS
AND STATEMENTS
CHAPTER 1
INTRODUCTION TO ACCOUTING RECORDS
UKAM1023
ACCOUNTING FOR BUILDING MANAGEMENT

FINANCIAL REPORTS
Financial reports basically consists of:
Statement of comprehensive income (Income
Statement)

Statement of Financial Position (Balance Sheet)

Statement of Cash Flows
Statement of Changes in Equity
Notes to the accounts.

INCOME STATEMENT
It shows the financial performance of an
entity over a period of time (e.g. yearly,
quarterly, monthly).
The income statement shows whether the
entity earned a profit or incurred a loss
during the period.
This is indicated as net income or net loss
on an income statement.
The income statement is also called
Statement of Comprehensive Income in
published financial reports (of big
companies).

INCOME STATEMENT
Income Statement for the year ended 31 December
2013

STATEMENT OF FINANCIAL
POSITION
Formerly called balance sheet
Shows an entitys financial position at a
point in time, e.g. end of a month, quarter,
or year.
The SOFP shows the assets, liabilities, and
shareholders equity at a particular date.
Shows:

Non-current assets
Current assets
Non-current liabilities
Current liabilities
Equity/Capital

STATEMENT OF FINANCIAL
POSITION
Statement of Financial Position as at 31 December
2013

OBJECTIVES OF FINANCIAL
STATEMENT
Financial statements should provide
information about the financial position,
performance and changes in the finances of
an entity.
Financial statements should be useful to a
wide range of users in making economic
decisions.
Financial statements are prepared on the
basis of established concepts and must
adhere to the rules and procedures set
down in regulations, called accounting
standards.

EFFECTS OF BUSINESS
TRANSACTIONS ON FINANCIAL
STATEMENTS
On 1 May 2012, B. Blake started in business
and deposited RM60,000 into a bank account
opened specially for the business
STATEMENT OF FINANCIAL POSITION AS AT 1
MAY 2012
RM
Asset
Cash at bank

60,000

Equity
Capital

60,000

EFFECTS OF BUSINESS
TRANSACTIONS ON FINANCIAL
STATEMENTS
On 3 May 2012, Blake buys a small shop for
RM32,000, paying by cheque
STATEMENT OF FINANCIAL POSITION AS AT 3
MAY 2012
RM
Asset
Cash at bank (RM60,000 RM32,000)

28,000

Shop

32,000
60,000

Equity
Capital

60,000

EFFECTS OF BUSINESS
TRANSACTIONS ON FINANCIAL
STATEMENTS
On 6 May 2012, Blake buys some goods for
RM7,000 from D. Smith and agrees to pay for
them some time within the next two weeks
STATEMENT OF FINANCIAL POSITION AS AT 6
MAY 2012
Asset

RM

Cash at bank

28,000

Shop

32,000

Inventory

7,000

Less: Liability
Account Payable: D Smith

(7,000)
60,000

Equity
Capital

60,000

EFFECTS OF BUSINESS
TRANSACTIONS ON FINANCIAL
STATEMENTS
On 10 May 2012, goods which cost RM600 were sold to
J. Brown for the same amount, the money to be paid
STATEMENT OF FINANCIAL POSITION AS AT 10
later
MAY 2012
Asset

RM

Cash at bank

28,000

Shop

32,000

Inventory (RM7,000 RM600)

Account Receivable

6,400
600

Less: Liability
Account Payable: D Smith

(7,000)
60,000

Equity
Capital

60,000

EFFECTS OF BUSINESS
TRANSACTIONS ON FINANCIAL
STATEMENTS
On 13 May 2012, goods which cost RM400 were sold to D.
Daley for the same amount. Daley paid for them
immediately by cheque.
STATEMENT OF FINANCIAL POSITION AS AT 13
MAY 2012
Asset

RM

Cash at bank (RM28,000 + RM400)

28,400

Shop

32,000

Inventory (RM6,400 RM400)

Account Receivable

6,000
600

Less: Liability
Account Payable: D Smith

(7,000)
60,000

Equity
Capital

60,000

EFFECTS OF BUSINESS
TRANSACTIONS ON FINANCIAL
STATEMENTS
On 15 May 2012, Blake pays a cheque for RM3,000 to D.
Smith in part payment of the amount owing.
STATEMENT OF FINANCIAL POSITION AS AT 13
MAY 2012
Asset

RM

Cash at bank (RM28,400 RM3,000)

25,400

Shop

32,000

Inventory
Account Receivable

6,000
600

Less: Liability
Account Payable: D Smith (RM7,000
RM3,000)

(4,000)
60,000

Equity

EFFECTS OF BUSINESS
TRANSACTIONS ON FINANCIAL
STATEMENTS
J. Brown, who owed Blake RM600, makes a part payment
of RM200 by cheque on 31 May 2012
STATEMENT OF FINANCIAL POSITION AS AT 13
MAY 2012
Asset

RM

Cash at bank (RM25,400 + RM200)

25,600

Shop

32,000

Inventory
Account Receivable (RM600 - RM200)

6,000
400

Less: Liability
Account Payable: D Smith

(4,000)
60,000

Equity
Capital

60,000

QUALITATIVE
CHARACTERISTICS OF
FINANCIAL STATEMENTS
Understandabili
ty

Relevance

Reliability

Comparability

QUALITATIVE
CHARACTERISTICS OF
FINANCIAL STATEMENTS
UNDERSTANDABILITY
Information in financial statements should
be readily understandable by users.

QUALITATIVE
CHARACTERISTICS OF
FINANCIAL STATEMENTS
RELEVANCE
Information in financial statements must be
relevant to users and influence their
economic decisions
That which is material is relevant and
should be included. Information is material
if its omission or misstatement could
influence the economic decisions of users.

QUALITATIVE
CHARACTERISTICS OF
FINANCIAL STATEMENTS
RELIABILITY
The information in the financial statements
must be reliable free from error and bias,
and able to be depended upon:
It must be a faithful representation of
transactions.
Transactions must be accounted for and
presented in accordance with their
substance, not their legal form.
Information must be free from bias.
A degree of caution should be exercised
when making estimates.
The information must be complete.

QUALITATIVE
CHARACTERISTICS OF
FINANCIAL STATEMENTS
COMPARABILITY
The measurement and display of the
financial effect of similar transactions and
other events must be done in a consistent
way throughout an entity and over time for
that entity, and in a consistent way for
different entities.
Users must be informed of accounting
policies used and any changes.
Financial statements must include
corresponding information for preceding
periods.

QUALITATIVE
CHARACTERISTICS OF
FINANCIAL STATEMENTS
CONSTRAINTS ON RELEVANT AND RELIABLE
INFORMATION
Information must be reported in a timely
manner.
The benefits of information should exceed the
costs of obtaining it.
The aim should be to achieve a balance
among the characteristics that best meets the
objective of financial statements.

ACCOUNTING
CONCEPTS
CHAPTER 1
INTRODUCTION TO ACCOUTING RECORDS
UKAM1023
ACCOUNTING FOR BUILDING MANAGEMENT

OBJECTIVITY
Financial accounting seeks objectivity and
consistency in the preparation and
presentation of information.
To achieve objectivity, a set of fundamental
rules have been devised, laying down the
way transactions are recorded.
These rules are known as accounting
concepts and are enforced by their
incorporation in accounting standards
issued.

1. HISTORICAL COST
The historical cost concept requires that
assets be normally shown at cost price.
Cost price is the basis for valuation of the
assets.

2. MONEY MEASUREMENT
The money measurement concept requires
that accounting information is traditionally
only concerned with facts that:
Can be measured in monetary units.
Most people will agree to the monetary value
of the transaction.

3. BUSINESS ENTITY
The business entity concept implied that
the affairs of a business are to be treated
as being quite separate from the nonbusiness activities of its owner(s).
Therefore, items recorded in the books of
the business are restricted to the
transactions of the business.

4. DUAL ASPECTS
The dual aspect concept states that there
are two aspects of accounting one
represented by the assets of the business
and the other by the claims against them.
This concept can be summarised by a form
of the accounting equation:
Asset = Capital +
s
Liabilities

5. TIME INTERVAL
The time interval concept requires that an
entity prepares financial statements at
regular intervals during the year.

6. ACCRUALS CONCEPT
The accruals concept states that the effects
of transaction and other events are
recognised when they occur and they are
recorded in the books and reported in the
financial statements of the period to which
they relate.
This allows income and charges relating to
the period to be taken into account by
matching the income with the expenditure.

7. GOING CONCERN
The going concern concept assumes that
the business will continue to operate for at
least 12 months after the end of the
reporting period.
This concept should only be ignored if the
business is going to close down in the near
future, or if a shortage of cash makes it
likely that the business will cease trading.

8. PRUDENCE
Accountants always exercise caution when
dealing with uncertainty while at the same
time ensuring that the financial statements
are neutral that gains and losses are
neither overstated nor understated this is
called prudence

LEARNING OUTCOMES
You should have now learnt:
Accounting is concerned with the recording,
classifying and summarising of data, and
then communicating what has been learnt
from it
Accounting has existed for at least 10,000
years but a formal, generally accepted
method of recording accounting data has
only been in existence for the last 500
years
It may not only be the owner of a business
who will need the accounting information.
It may need to be shown to others, e.g. the

LEARNING OUTCOMES
Accounting information can help the
owner(s) of a business to plan for the
future.
The accounting equation is:
Capital = Assets Liabilities

The two sides of the accounting equation

are represented by the two parts of the
statement of financial position.
The total of one part of the statement of
financial position should always be equal to
the total of the other part.

LEARNING OUTCOMES
Every transaction affects two items in the
accounting equation. Sometimes that may
involve the same item being affected twice,
once positively (going up) and once
negatively (going down).
Every transaction affects two items in the
statement of financial position.
Why one set of financial statements has to
serve many purposes
Why the need for general agreement has
given rise to the concepts and conventions
that govern accounting.

LEARNING OUTCOMES
The implications of objectivity and
subjectivity in the context of accounting
What accounting standards are and why
they exist
The assumptions which are made when
recording accounting data
The underlying concepts of accounting

LEARNING OUTCOMES
How the concepts and assumptions of
materiality, going concern, comparability
through consistency, prudence, accruals,
separate determination, substance over
form, and other concepts and assumptions
affect the recording and adjustment of
accounting data and the reporting of
accounting information
That an assumption is made that monetary
measures remain stable, that is that
accounts are not normally adjusted for
inflation or deflation

END OF LECTURE
CHAPTER 1
INTRODUCTION TO ACCOUTING RECORDS
UKAM1023
ACCOUNTING FOR BUILDING MANAGEMENT